BY: VALERIE DYE
When a person dies owing debts, these debts do not disappear. Creditors need to be paid out of the deceased’s estate before any distribution of the assets to the beneficiaries. The executor of the deceased’s estate has to be very careful to advertise for creditors and ensure that all debts are paid. If this is not done the executor may become liable for those debts.
The deceased’s debts are to be paid from his estate, and as such if the estate is insolvent the beneficiaries do not need to pay creditors out of their own money. The creditors will simply not be paid.
Bearing in mind that creditors are paid out of the estate of the deceased, how can persons ensure that they make provisions for their loved ones without fear that creditors will claim their assets.
Section 196 of the Insurance Act states that:
Where a beneficiary is designated, the insurance money, from the time of the happening of the event upon which the insurance money becomes payable, is not part of the estate of the insured and is not subject to the claims of the creditors of the insured.
This provision in the Insurance Act provides a means of protecting assets from creditors so that provision is made for beneficiaries. It is important to note that if the deceased has a life insurance policy and no beneficiary is named, the proceeds of the policy become part of the estate and as such any debts owed by the deceased to creditors will be paid from the proceeds of the insurance policy. If a beneficiary is named in the insurance policy the proceeds of the estate do not pass to the estate and creditors cannot claim any part of the proceeds.
RRSP’s are treated in the same way as insurance policies, provided that a beneficiary is named on the RRSP.
The case of Amherst Crane Rentals Limited vs Arlene Clare Perring provides an example of the treatment of RRSP’s after the death of the deceased. In that case, the deceased named his wife as beneficiary of three life insurance policies valued in excess of 1 million dollars and two RRSP’s valued at $117,000. He owed the sum of $53,000 to Amherst Crane Rentals. His estate was bankrupt as he had no assets to pay his debts. Naturally, Amherst Crane Rentals sought to obtain payment from the proceeds of the RRSPs. Amherst, being aware that the insurance proceeds were not available to pay the debts, incorrectly assumed that a claim could be made against the RRSPs.
The Ontario Court of Appeal upheld the ruling of the lower court stating that since the wife was designated a beneficiary of the RRSP’s these funds did not pass to the estate and therefore could not be claimed by creditors.
An important distinction is that during the life of the deceased, creditors can claim the proceeds of the RRSP even though a beneficiary is named. After death, however, the RRSP does not belong to the estate once a beneficiary is named and a creditor has no claim to those proceeds.
The key is, therefore, to name designated beneficiaries of life insurance policies and of RRSP’s in order to ensure that money is left for your loved ones which cannot be claimed by creditors in the event that your estate is insolvent.
